Here's one way to think about the bailout rejection: Overseas investors have been an important, if undercovered, aspect of the story. And in a globalized world, they matter as much as our own investors to the overall strength of the U.S. economy. They're the ones who buy our bonds, who invest in our property, who make our dollar the default world currency. Without those things, American economic power would greatly diminish. Their confidence perked two Fridays ago when the outlines of the Paulson plan emerged, then began to ebb as it became clear that the plan would not in itself right the financial system and that, in any case, significant opposition was likely to restrict or destroy it.
These fears rose and fell last week, but overseas investors were pretty pessimistic this morning, as they digested the final scope of the Paulson plan. Markets around the world were down, as were U.S. markets. The question is, were they down because of what they felt was a too-limited bail out, or because they feared the plan wouldn't pass? Or some combination of the two? It's not an academic question: If it was the former, then the near-term fallout from the negative vote won't be too bad, because they didn't think it would be much help anyway. If it was the latter, then Congress has just made their fears come true.
I think, though, that in the long run we're screwed one way or the other. The failure of the plan in the face of guys like Texan Republican Jeb Hensarling, who called the bill creeping "socialism," will permanently discredit our financial system in the world's eyes. If the U.S. government won't step in when things are really bad, how can it be expected to make the long, tedious effort to dig into the system and fix it?